Centralized Exchange VS Decentralized Exchange: Which will reign in the Future?

For a long time, there has been a debate between the merits of centralized and decentralized crypto exchanges. Although decentralized platforms have sought to forcefully push centralized exchange out of the race, it’s unclear on which between the two will reign in years to come.

The birth of Bitcoin was supposed to ignite a new wave in the finance sector by introducing frictionless international transactions, trust transactions, etc. Unfortunately, the birth of virtual currencies was followed by theft, fraud, regulations, extortion, among others.

Traders prefer centralized platform

Fortunately, the crypto market has experienced phenomenal growth gauging by its ten-years existence. Crypto-focused businesses have sprouted and flourished. However, centralized virtual currency exchanges have been catering to the needs of crypto traders.

Some of these centralized cryptocurrency exchanges have grown to become formidable forces in the crypto world; they have a reputable trading volume, a welcoming user interface that caters for both beginners and veterans, and have a wide array of listed cryptos.

Coinbase, a leading centralized exchange,” allows you to purchase cryptocurrencies in a variety of ways, providing integrated tools and technical indicators to make transactions easier and more efficient.”

Centralized platforms have features found in traditional finance

With such features, the exchange looks to have no problems from a distance. Interestingly, with decentralized exchanges only gaining popularity, traders prefer to use centralized crypto platforms. One of the features that attract traders to centralized exchanges is the aspect of traditional finance like insurance on these platforms.

However, the traders’ affinity to a traditional feel may be exposing them to risks that could have been mitigated by using decentralized exchanges.

For example, centralized exchanges have been prone to hacks. In 2018, there were approximately 5 exchange hacks. In 2019 there have been 7 hacks so far, with the most significant being CoinBene’s where 45 million US dollars was stolen. It was followed by Binance, which lost 41 million US dollars. Unfortunately, the exchanges fail to learn from the losses to build better alternatives.

Furthermore, for many critics, the operation of centralized exchanges works against the spirit of blockchain, which is decentralized.

“However, the scalability of blockchain technology and decentralized infrastructure has been slow to develop. In order to meet the global demand for fast transactions in cryptocurrencies, centralized exchanges have to down the chain of most transactions.”

Cryptocurrencies are decentralized, transactions are centralized

Ironically, while cryptocurrencies are decentralized, the transactions are far from being decentralized. This includes traders performing know-your-customer procedures and trusting the centralizer with funds. Consequently, the centralizer is at the mercy of regulators. With the centralizer holding millions and or billions of US dollars, hackers can’t stop salivating for the funds leading to more losses.

As the Ethereum founder, Vitalik Buterin, puts it, “I absolutely hope that the central trading place will be burned in prison.”

Decentralized exchanges, unlike their centralized counterparts, have no central point of failure. Additionally, they do not hold a pool of traders’ funds. Therefore, thieves have fewer incentives to breach security. Also, regulators have no one to target. Even with such advantages, traders still find it hard to use decentralized exchanges (DEX).

Decentralized platforms are the future

Despite the various positives, as some commentators have pointed out, “Decentralized exchanges lack consistency in trading instruments. Traders are accustomed to logging into their accounts to view market indicators for their current transactions, funds, and trading interfaces. This integration is common in centralized exchanges that control the entire platform, but is not common in DEX.”Fortunately, as decentralized exchanges get more attention, traders will have no choice but to reevaluate why they need to pay intermediaries, insurance, and why their identity should be shared when they don’t need to. As such, decentralized platforms appear to be the future.